NGPF Activity Bank

Investing

CALCULATE: The Value of Compound Interest [Answer

Key]
You can calculate compound interest by figuring out the interest after the first year, adding it to the principal, and then
calculating the interest on that new, larger pool of money. You can keep going like that, using a table to keep track of the
money each year, for as many years as you wanted. There are also mathematical formulas you can use, which take less
time but require a deeper understanding of the math. Even more convenient are compound interest calculators,
available for free on the internet. We’ll use one of those from Investor.gov: Compound Interest Calculator

Compound Interest in Various Scenarios

Use the compound interest calculator to answer each of the questions below. Hint: the principal will be the same as the amount
saved each month (the first time it is saved is the “Current Principal” and each time after that is a “Monthly Addition”). For
simplicity’s sake, leave the compound interest set to 1 time per year. Round all monetary answers to the nearest whole dollar.

1. Raul is a saver. He sets aside $200 per month during his career of 40 years to prepare for a comfortable retirement. He
does not like the idea of investing so he puts his money in a savings account which earns 2% interest per year. What is the
balance of his retirement account after 40 years?
$145,406
[Principal = $200; Monthly Addition = $200; Years to Grow = 40; Interest Rate = 2%; 1 time per year]

2. Pamela is also a saver. She sets aside $200 per month during her 40 year career. She invests in the US stock market*
through an index fund that averages a 7% return over this 40 year period. How much is her retirement account worth?
$482,119
[Principal = $200; Monthly Addition = $200; Years to Grow = 40; Interest Rate = 7%; 1 time per year]

3. Isaiah reads articles about the insufficient savings of those in retirement and decides he needs to start saving now, even
though he’s in his 50s. He saves $500 per month for 15 years and earns 7% by investing in the stock market* through an
index fund. What is the value of his retirement account after 15 years?
$152,154
[Principal = $500; Monthly Addition = $500; Years to Grow = 15; Interest Rate = 7%; 1 time per year]

4. Make up one additional scenario and write out the terms below. Calculate how much the person will have.
Answers will vary

5. What are the lessons that you can draw from these examples regarding compound interest?
www.ngpf.org Last updated: 8/22/17
1
 Answers will vary and may include, but are not limited to:
● Interest rate matters a lot for your savings growth -- a higher interest rate between A & B resulted in more than
$300,000 earnings.
● If you’re going to save a long time for retirement, you should choose the stock market, not a savings account.
● The length of the investment also matters -- it’s better to start saving when you’re young than to wait until you’re in
your 50s.
● Someone saving a smaller amount monthly, like $200, for a long time is better off than someone saving a larger
amount, like $500, for a short time.

*Note: The stock market does not actually guarantee compound interest. Stocks rise and fall in price daily, and even throughout
the day, so your total earnings ultimately depend on the price at which you buy and sell the shares. Compound interest is an
approximate model for how indexes have historically grown, not a guarantee for future growth. We use it here for simplicity.

www.ngpf.org Last updated: 8/22/17

2